Ones to Watch in Hedge Funds 2016 – Overcoming the Obstacles

AppleTree Capital faced the ultimate crisis in 2011, suffering a -34.17% annual return. While most investment managers would have cut their losses and shut down the fund, the team at AppleTree spent two years earning back money for their investors. This is a testament to the commitment they show to their clients. We spoke to Michael Nicoletos, Managing Director at AppleTree Capital, to find out more.

AppleTree Capital faced the ultimate crisis in 2011, suffering a -34.17% annual return. While most investment managers would have cut their losses and shut down the fund, the team at AppleTree spent two years earning back money for their investors. This is a testament to the commitment they show to their clients. We spoke to Michael Nicoletos, Managing Director at AppleTree Capital, to find out more.

In general, most hedge fund managers tend to shy away from speaking about their negative results. However, AppleTree Capital believes that this negative experience at the beginning of their journey made them learn their lessons swiftly and at an early stage, helping them produce consistently positive returns ever since.

“2011 was a disaster,” says Nicoletos. “Of course, like most hedge fund managers, the first thing that came to our minds was to give up and do something else. But we simply could not do that to our investors. We decided to liquidate the fund, take one month off to clear our minds, and then come back to see what we were doing wrong. When we returned, we reassessed everything: our processes, the way we looked at markets, even the way we positioned our trades. This reassessment, together with hard work, soon bore fruit, as we managed to recoup our losses in just two years. I think this shows the level of commitment we have towards our investors. It is this high level of dedication that lies at the heart of everything we do.”

“Our investors know that we will not sink, no matter how rough the sea is,” Nicoletos adds. “We care about them, and it’s not just about making money and getting returns. Of course, this is the nature of the business that we are in, but it is also much more than that: it is about trust, dedication, and perseverance.”

“Across the industry, there has been a lot of talk lately about hedge fund managers underperforming and not deserving the fees they earn. At face value, this is because many passive funds have outperformed active managers. However, I believe that we need to look beyond that: if fund managers are good at what they do, and illustrate a high level of commitment and vigour, then there is certainly a value to their role.

I think we – at AppleTree – have exemplified this to our investors: not only have we outperformed our benchmarks (this is including the losses during the first 2 years), but we have also demonstrated that we will always be thoroughly transparent in whatever we do, and fully reliable whenever they need us.”

Apace with their efforts to make their investors’ money back, AppleTree decided to fundamentally change the fund’s investment philosophy, in order to ensure that a crisis like the one that hit them in the beginning would never occur again. “When we lost this much money, we completely changed our mentality” says Nicoletos. “First, we decided to focus on the macro-level aspects of the global economy, in order to get a bigger and more complete picture of the financial landscape. Questioning our ideas on a daily basis and identifying any prevalent behavioural fallacies in finance (both personal, and across the industry) became the key ingredient of our investment approach. As a result, we started positioning our investments a lot better, while also improving the efficacy of our hedging methodology. Our consistent positive results since then speak for themselves.”

“When it comes to emerging markets, we always have our eyes set on the bigger picture. For our long/short equity fund, which trades primarily in Eastern and South-Eastern Europe, we first take a top down approach in terms of the global macro situation: we look at areas such as China, Europe, and the US, we look at commodities, but we also look at central banks, the flow of funds, political changes, and any other broad systemic factors. After having solidified our global macro-level understanding, we then look at each country we invest in separately. Once we identify the drivers that will benefit (or hamper) specific countries, we dive deeper and use a bottom up approach to look at key fundamentals.

We then simply pick the firms that we like, and take long positions, and the firms that we don’t like, and take short positions. Of course, there is much more to our methods, but this is the key outline of how we operate. Hence, although we focus on a specific region in the emerging markets world, we do look at the global state of affairs prior to executing our strategy.”

Just one year after their crisis, they achieved an annual return of 27.93%. In 2015, a year that provided intense headwinds for many hedge funds, AppleTree achieved a return of 18.85%.

Nicoletos’ openness about their previous pitfalls is a further testament to the level of transparency at AppleTree, which is another cornerstone of their philosophy. “Transparency is extremely important to us,” explains Nicoletos. “Apart from our monthly newsletter, which is used to keep our investors updated with how the fund is doing, we also think it is very important that our clients have access to us at any time, feeling confident at the answers they will receive, no matter how tough things are. On top of this, we also hire independent third parties that allow our investors to crosscheck our operations, providing them with an extra layer of confidence in our work. In that sense, our investors gain full knowledge of what we are doing and how we intend to move forward. This has allowed us to build strong and lasting relationships with them.” Prior to AppleTree, Michael

Nicoletos worked as Head of International Equities at EFG Eurobank Securities, a Greek owned banking group, obtaining extensive experience in this niche area of emerging markets. During this time, he advised both retail and institutional clients and was an active member of both Eurobank EFG Securities’ and Eurobank EFG Private Banking’s market strategy committee. Furthermore, he was among the first international traders to trade in Romania, Bulgaria and Serbia and took part in the first large IPOs across the region. It was during his time at Eurobank that Nicoletos met Dimitris Apistoulas, his partner at AppleTree Capital.

Since its inception in 2010, the firm has kept a small, tightly-knit team, allowing the company to grow and develop organically, while making sure that all of its members follow the same core principles and vision. “We are a small team, but I believe that this is something that has worked in our favour,” says Nicoletos. “We communicate very well, and there is a high level of consistency in everything that we do.”

Looking towards the future, Nicoletos is confident that AppleTree Capital will continue to grow on its recent success. Moreover, AppleTree is very excited to announce that the company is in the process of opening a new office in London and getting an FCA licence, where they hope to add another fund to their portfolio. “Dimitris and I have always found the hedge fund industry an interesting and challenging place to work in, and we are very optimistic about opening a new office in London. With this transition, we will shift our primary operations in London (we intend to keep our office in Athens as support to the London office). It certainly is an exciting time for our business, and we are very much looking forward to the rest of 2016 and beyond.”